Mistake No. 3: Failure to Segregate Business Enterprises into Distinct Entities
When you operate too many business ventures out of the same company,
you place all of your ventures at risk. Segregate your business enterprises into distinct entities.
Growing up, Pete and Fred were as inseparable as two brothers can be. Not surprisingly, when Pete and Fred entered the business world, they did so as partners. Fred learned of an opportunity to import inexpensive furniture from the Orient, which the brothers sold to their college classmates. Upon graduating, the brothers opened a small shop to sell their wares.
The brothers made a good team, and their business prospered, leading to additional opportunities. They expanded their operations, creating a very profitable financing division that supported the sales division.
Their foreign contacts put them in touch with clothing manufacturers, and they began to import clothing. The clothing was wildly popular, particularly with young people. Soon the brothers had a second chain of stores, this time focusing on clothing. As their profits grew, the brothers purchased retail space for each of their store fronts. They also obtained increasingly larger lines of credit to finance their businesses.
Styles changed, and the clothing line floundered. Initially, the brothers attributed the drop in sales to generally slow retail sales, but after time they concluded that the market had changed fundamentally. They cut prices hoping to recoup their costs, but the clothing still did not sell. Ultimately, they had to close the clothing stores.
Fortunately, the furniture business remained profitable, and the finance division was a steady source of income. The profitable divisions could cover the obligations of the clothing stores.
Their banker had different ideas. Fred and Pete had nearly $500,000 on their line of credit when the bank refused to renew the loan and demanded immediate payment of their obligation.
How to Avoid Mistake #3:
Pete and Fred treated their business dealings as a single venture, when it actually consisted of many discrete businesses. Each furniture store and clothing store is a separate business, each building a separate venture. Separating each store and building into a s eparate corporation or limited liability company allows business owners to treat each portion of their business enterprise as what it really is – a separate and independent business undertaking.
Separating business ventures increases accountability. Each business venture either makes or loses money on its own merit. A wildly profitable store is not dragged down by an unproductive location. Separateness allows you to make business decisions based on the merits of each unit.
Separated business entities create wealth.